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Sir plz explain the extract from lease technical article :
If a lease contains a clean break clause, where the lessee is free to walk away from the lease agreement after a certain time without penalty, then the lease term for accounting purposes will normally be the period between the commencement of the lease and the earliest point at which the break option is exercisable by the lessee. If a lease contains an early termination clause that requires the lessee to make a termination payment to compensate the lessor such that the recovery of the lessor’s remaining investment in the lease was assured, then the termination clause would normally be disregarded in determining the lease term. Similarly the same principle applies, if the lease agreement states that the lease can only be terminated in remote circumstances, with the permission of the lessor or on entering a new lease agreement for the same or equivalent asset.
Which bit do you want me to clarify?
Clean break? Can you simply walk away from the lease agreement without having to pay any penalty? Is yes, then the lease term is the period from inception through to the earliest date that you are able to walk away
Compensatory termination clause within the lease agreement covering the possibility that a lessee that tries to break a lease agreement contract faces the prospect of having to compensate fully the lessor? In that situation, the possibility of such action from the lessee is not taken into account when determining the lease term
Similarly, if the possibility that the contract will be broken is only slight but that possibility is mentioned within the lease contract, where the break is only possible with the permission of the lessor or the lessee will have to enter a new lease in order to be able to break the old one, then such possibility / provision shall be ignored for the purposes of determining lease term
Ok?
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